Thursday, November 01, 2012

We do have existing laws to bring charges against banking criminals!

Among
the many downright lies that have been told about the present series of
financial scandals in the banking sector, including the PPI and interest rate
swap derivatives scams, and particularly the LIBOR manipulation, is the one
that asserts we do not have sufficient existing laws to deal with these
episodes, and that new criminal legislation must be enacted.

In
a speech, Martin Wheatley the new head of the FSA/FCA said of proposed LIBOR
reforms;

"...As part of this process, my final recommendation is to amend
the Financial Services and Markets Act to include, as an offence, the making of
a false or misleading statement in order to manipulate Libor. This would enable
the FSA to use criminal powers for the worst cases of attempted manipulation..."

Even this small quote marks Wheatley out
as a financial crime apologist who wants criminal powers to be used only for
the 'worst cases of attempted manipulation.' Quite how bad the criminal
activity has to get before it falls within his definition is hard to determine,
but he clearly believes that there is some kind of dubious distinction
between different degrees of market
manipulation, some which would attract criminal intervention, some which would
not!

So, in response to a number of readers
who have commented so positively on some of my recent blogs, I will try to explain
why we have good laws already, all of which could be used to prosecute the
banksters and organised criminals who have profited from the PPI crimes or the LIBOR manipulation scams, and the only reason
why nothing is currently being done to prosecute these wrongdoers is because
the Government cannot face the thought of having to admit to the rest of the
world that the City of London is a vast criminal enterprise waiting to rip-off
the unwary, the unknowing and those who are not on the inside track!

I will deal first with mis-selling of
various products such as PPI or interest rate swaps.

When a customer approaches a bank for a
loan, they are entering into an 'authoritarian' relationship. The bank hold the
position of authority and is able to make or decline the loan on whatever terms
it sees fit. The two parties are not on an equal footing, and the applicant is
very much in the subordinate role.

In a case where the bank is considering
the loan and in the process of so-doing suggests the purchase of a second
product to guarantee the repayment of the loan in the event that anything untoward
should befall the borrower, the bank is entering into some very tricky areas of
law.

The person making the sale of such a
product is under instructions from a manager to sell as many of these products
as possible as they are a very good means of generating revenue for the bank,
and they don't want to put obstacles in the way of closing those sales, so the
temptation exists to keep unwelcome facts from the person being offered the
product.

In most of the PPI and interest swap
cases, the clients were either not told the truth about the need for such a
product, or were not told the truth about the way in which the product would
operate. They were not in a position to discuss these matters equitably because
they were in a position where they were being told facts by an authoritarian
figure, in circumstances where the applicant would expect to believe that the
information being given to him was true and accurate.

In a huge number of cases, clients were
told that the grant of the loan would be dependent upon their purchasing an
insurance policy. This was not necessarily improper, the lender can impose
conditions to ensure that the loan is repaid in full within the time limit, but
then the person making the loan has a legal duty to ensure that the type of
policy is fit for purpose and will really provide the kind of cover needed for
those circumstances.

However, at the time of the scandal,
banks were falling over themselves to lend money to loan applicants, so in a
vast number of cases, taking out PPI insurance was not a pre-condition for the
loan.

The fraudulently-sold
PPIs were those that did not provide the full cover that was offered to the
customer, and which
the customer was deceived into believing he was getting. This was because the details did not apply to the individual
customers’ circumstances. It was discovered that PPIs had been fraudulently sold when a high rate of unsuccessful claims were later made against the policies.

A report by the consumer
watchdog 'Which?' as long ago as 2006 estimated that a third of the policies
taken out in the previous five years were fraudulently mis-sold. Even in those
days an astonishing two million people paid out for insurance that was useless.
They would never have been able to claim on their policies because they were
ineligible for the cover they had been persuaded to buy.

For
example, policies had been sold to the self-employed or those on fixed-term
contracts, while the insurance policy typically covered only those who lost
their job with an employer.

Another
bad practice that was rife at the time was that payment for cover could be made
up-front, in a single premium that was added to the loan - thus increasing the
amount of interest due. Even the insurance industry's own trade body, the
British Insurance Brokers' Association, branded single-premium PPI policies
"bad value", and as long ago as 2006 called for such policies to be
outlawed.

But
it became almost impossible to stop their sale because in so
many cases, sales staff working for banks or financial companies received lucrative financial
bonuses for successfully selling Payment Protection, Insurance to customers, the banks were making vast sums of money from
policies which in so many cases they would not have to pay out on, and the
encouragement to continue to push the sale of PPI insurance was very strong.
Staff members were even threatened with the loss of their jobs if they did not
keep up a sufficient level of sales targets.

So,
the salespeople stood to make a financial gain for themselves while at the same
time selling a product that would not pay out on a future claims, so the
customer was being defrauded.

The
law dealing with these kind of sales is contained now in the Fraud Act of 2006.
It states;

Fraud

(1)A person is guilty of
fraud if he is in breach of any of the sections listed in subsection (2) (which
provide for different ways of committing the offence).

(2)The sections are—

(a)section 2 (fraud by
false representation),

(b)section 3 (fraud by
failing to disclose information), and

(c)section 4 (fraud by
abuse of position).

(3)A person who is guilty
of fraud is liable—

(a)on summary
conviction, to imprisonment for a term not exceeding 12 months or to a fine not
exceeding the statutory maximum (or to both);

(b)on conviction on
indictment, to imprisonment for a term not exceeding 10 years or to a fine (or
to both).

2. Fraud by false representation

1. A person is in breach of this section if he-

a) dishonestly makes a false representation, and

b) intends by making the representation-

to make a gain for himself or another, or

to cause loss to another or to expose another to risk of loss.

2. A representation is false if-

a) it is untrue or misleading, and

b) the person making it knows that it is, or might be, untrue or misleading.

3 Representation means and representation as to fact or law, including a representation as to the state of mind of-

a) the person making the representation, or

b) any other person

4 A representation may be express or implied

3, Fraud by failing to disclose information

A person is in breach of this section if he-

a) dishonestly fails to disclose to another person information which he is under a legal duty to disclose, and

b) intends, by failing to disclose the information-

to make a gain for himself or another, or

to cause loss to another or to expose another to a risk of loss.

So where a
salesman made a false representation about the value of the insurance product
he would fall directly within section 2; if he failed to tell the customer the
truth about the way the product would operate, he would bring himself within
section 3.

I think it reasonably clear just by reading the legislation that all
PPI cases could and should be easily prosecuted, and when Martin Wheatley publicly
states that he considers misselling to be a very long way from fraud, he is
demonstrating his complete ignorance of the law, a worrying trait in a senior
regulator!

In the case of
LIBOR manipulation, the evidence of crime is even more straightforward.

Even Martin
Wheatley understands its real function which is to act as a vital reference
point to which a vast financial industry has recourse to get transparent and
accurate information about interest rates, a feature which they will use in turn
to set other interest rates for a huge range of commercial purposes. In a
speech he stated:

"...Libor
is used in a vast number of financial transactions; with a value of at least
$300 trillion. The deep entrenchment of Libor as a reference rate in financial
markets, and the subsequent effect on those markets in the event of a
disruption to the rate...even in the more liquid markets there is not enough
daily data available to have a system in place that is entirely based on market
transactions, particularly in times of stress...and we must remember that Libor
is a creation of the market, invented by the market for the market..."

LIBOR is transparently a record which is required for an
accounting purpose, and there is a perfect criminal offence already in
existence to deal with those persons who manipulate it.

Under Section
17 of the Theft Act 1968, the offence of false accounting is defined;

1 Where a person dishonestly with a view to gain for himself or another or with intent to cause loss to another,-

a) destroys, defaces, conceals or falsifies any account or any record or document made or required for any accounting purpose; or

b) in furnishing information for any purpose produces or makes use of any account, or any such record or document as aforesaid, which to his knowledge is or may be misleading, false or deceptive in a material particular.

He shall on conviction on indictment be liable to imprisonment for a term niot exceeding seven years.

2 For purposes of this section a person who makes or concurs in making an account or other document an entry which is or may be misleading, flase or deceptive in a material articular, ir who omits or concurs in omitting a material particular from an account or other document, is to be treated as falsifying the account or document.

Any person in
any institution who connived in seeking to get false figures inserted into the
calculation of LIBOR brings themselves directly within the ambit of S.17,
because by so doing they are falsifying the information required for the
calculation, and LIBOR is a record required for an accounting purpose, indeed,
I cannot think of a better example of such an entity whose purpose is to simply
provide information that others require for creating accounting information, ie
interest rate setting.

As the document states any person who makes such a
false entry or even only concurs in making it is guilty of the offence.

My friend Ian
Fraser brought to my attention a powerful submission to the Parliamentary Commission
on Banking Standards written by Michael Moran, and Karel Williams from the Centre for Research on
Socio-Cultural Change (CRESC). When talking about the culture of ethical indeterminacy
within Barclays Bank they report;

'...If this seems far-fetched and fanciful, consider the terms in
which the Financial Services Authority (FSA) indicted Barclays for LIBOR manipulation.
The staid FSA prose is startling because it reveals collusion by bank employees
in one firm to benefit traders operating in another firm. Paragraph 8 of the
FSA proceedings reports that:

“...Barclays acted inappropriately and breached Principle 5 on
numerous occasions between January 2005 and July 2008 by making US dollar LIBOR
and EURIBOR submissions which took into account requests made by its interest
rate derivatives traders (‘Derivatives Traders’). At times these included
requests made on behalf of derivatives traders at other banks. The Derivatives
Traders were motivated by profit and sought to benefit Barclays’ trading
positions...”

So here is a
perfect illustration of conduct which is a criminal offence and which could be
used today to bring criminal prosecutions against every individual who has
played any dishonest part in fiddling the LIBOR figures.

The gain they
have made is either a positive one for themselves in pure monetary terms,
'motivated by profit' but it would also
cover the case where a derivatives trader is permitted to minimise his losses
by submitting false figures to be used in the calculations.

So why we now
need new legislation to cover the activities of those who have criminally manipulated
the LIBOR market is beyond me. I suspect that the problem is that there are so
many people involved in this single episode of organised crime that yet again,
the British Government is looking for a series of ways to sweep the problem
under the carpet so that yet again, they can cover up the fact that the London
market is a den of thieves!

I have not
bothered here to cover the details of the inchoate offences of conspiracy to
defraud because we already have perfectly good direct criminal offences which
could be charged, if those with the responsibility for regulating these markets
had any moral courage or willingness to take on the big players.

The fact that
they don't is a matter of scandal, but I have tried to show in previous blogs
how pathetic the present regime is inside the FSA/FCA, and why we cannot expect
anything to change.

One thing we do
know is that the Parliamentary Commission into Banking Standards is just going
to be a vast dead Albatross hung around our necks, and all those like us who
want to see real change in the banking sector. I submitted a 22 page protocol
of evidence to them and asked to be invited to come and give evidence on why we
need to prosecute bankers more assiduously. I have discovered today that they
haven't even included my paper within their written documentary record, so I
doubt there will be any chance to defend my views in any interview.

8 comments:

Jesus H Christ Rowan. Your final paragraph says it all - they are burying any notion that good sound legislation exists. But that is not half as much fun as requesting some new legislation with the discretion on whether to use it resting with the FSA boss. This way the hapless public will be duped into thinking the banksters go away with because the law was lacking/inadequate.The situation merely confirms the venality or stupidity of Wheatley. Either way he is showing himself to be a master manipulator. That said, we all need to keep going and perhaps consider issuing press releases setting out the issues in a series of bullet points. Eventually something will get the attention of mainstream media. If you go this route selecting the media and specific contact within each one becomes a critical factor. (Private Eye has to be on the list.) Ashley

Really do hope the case for the prosecution is growing Ashley as its about time! Found your break down of what constitutes fraud very useful Rowan. Still hoping it won't be long before knowingly selling front end loaded discounted sub-prime mortgages, with sales incentives of several thousand per loan,to people who had no means by which to meet the vastly hiked payments when they more than doubled after the short term low payment honey moon period expired, may eventually take up their rightful place in the miss-selling scandal. In reality I suspect this will be far from the case if Mr Wheatley and his gang have anything to do with it as the cost of compensating the losses would leave 10bn for PPI mis-selling paling into insignificance and those who stood by and watched happen with far too much egg on their faces. http://lifeafterdebts.blogspot.co.uk/2012/10/placation-and-platitude.html

I do appreciate the legal rundown, although I've never doubted Rowan was right that the laws are there.

I won't write an essay here but bigger public outcry on a definite subject that catches the headlines is required IMO.

There are huge parallels here with press regulation. Dirty as hell, everyone knows it, the laws are there, but no teeth in their enforcement.

Good journalism blew that open in a number of ways. I think particularly of the Milly Dowler phone hack story. As Nick Davies (the journo who broke it) says, the day after that story everything changed.

I'm not saying Leveson will do the job. Maybe he will be toothless in the end. But his initial document was quite fierce. He's closer on the press than anyone is on the banks.

Incredible. I was expecting to need a good night's sleep and several strong cups of coffee before attempting to understand this post...

...but it's all so clear cut and so easy to understand.

Like lifeafterdebt I'm positive that all of the many varieties of derivative mis-selling can be equally deftly shown to be criminal. But even without them, this is enough. Hawkeye is on the money - the British public won't stand for it.

Thank you Rowan for demonstrating that this potent weapon was lying around unused. Now we need to get it in the hands of the people before the cowards in parliament can rewrite the laws in bankers' favour.

About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!